GDP Report -- A Lesson in Messy Data

On Friday 4/30 the Commerce Dept. (more specifically, the Bureau of Economic Analysis, or BEA) released its first estimates of economic activity for the first quarter. The headline number was that GDP grew in the first quarter at an annual rate of 3.2%. OK...that's a number, but what does it mean?

First, you need to ask whether that is a figure that adjusts for inflation or not. News accounts didn't make the distinction, and the first few paragraphs of the official release don't say either. I had to dig pretty far into the news release to be sure that, yes, that figure is a post-inflation number.

The BEA estimates total economic output for the quarter and then "annualizes" it...which is a fancy way of saying, "multiply by four" (or, "add one; raise to the fourth power; subtract one"). But, it does little good to know that output went up by 2% if inflation was running at 2% -- the net growth is really zero in that case. So, the BEA wisely factors in the amount of inflation that it measured. Along with the economic output data, the staff comes up with a "price deflator." In Q1 2010, the BEA figured that total output grew by 1.02%. Annualizing that figure, we get 4.1%.

Now the question is...how much of that was eaten up by inflation? The BEA figured that prices rose at an annual rate of 0.9% in the quarter, which results in the net reported figure of 3.2%. With me so far...?

But, if I wander over to the website of the Bureau of Labor Statistics (part of the Department of Labor), I find that those folks figured that prices rose by an annual rate of 3.1%. Subtracting that from the 4.1% total growth rate reported back over at the BEA, and we get a net figure of only 1.0%, not the 3.2% reported by BEA!

So what's going on here? Is this some secret government conspiracy where the Commerce Department wants to say the economy is great and the Labor Department wants to say, no, it's not...? I don't subscribe to such theories. I think simpler and more mundane explanations are at work. The fact of the matter is that nobody knows for sure just what happened in a particular quarter until a year or so later. The Commerce Department has three scheduled revisions of the GDP figures yet to come. Frankly, I trust the Labor Department's inflation figures since they have far more resources dedicated to gathering the data and emply state of the art statistical methods and concepts in deriving a useful price index.

Whichever figure you want to use -- 3.2% or 1.0% -- the fact of the matter is that this growth rate is not sufficient to soak up unemployment. Productivity grows at 1.6% to 1.8% per year; the workforce grows by 1.0% or so. These combine to "use up" all of the growth we are experiencing at the moment, and don't provide much room to put everybody back to work.

The economy is still digging out of a hole and we've got a ways to go.